Editorial of the “World”. Is the best the enemy of the good? The question arises about the plan to support the American economy, which must be adopted by the Senate in the coming days. The new President of the United States, Democrat Joe Biden, has decided to cause an electric shock by spending 1.9 trillion dollars (around 1.6 trillion euros) to repair the damage caused by the Covid-19 pandemic. While the principle of this fiscal stimulus is not up for debate, its magnitude and the time at which it intervenes pose risks of overheating on the economy.
The decision is unprecedented in peacetime. By adding to the 900 billion already released in 2020, the plan will bring the budget deficit of the United States to 18% of gross domestic product (GDP), only four points less than at the end of the Second World War. Larry Summers, yet politically close to Joe Biden as former Secretary of the Treasury to Bill Clinton and former economic advisor to Barack Obama, believes that this plan is disproportionate to the damage suffered by the American economy.
The cost of the measures taken is equivalent to 13% of the GDP, while it fell by only 3.5% in 2020. Democrats are haunted by the reproaches that were leveled at the Obama administration during the 2008 financial crisis. So accused of not having done enough, they decided this time not to skimp.
The return to growth promises to be faster
Even if it is legitimate to help the unemployed and the most precarious, who have been severely affected by the effects of the pandemic, the effort aimed at the middle classes seems less justified. Many American households, failing to have been able to spend during the confinements, find themselves at the head of a substantial savings, to which will be added government aid, which will artificially boost consumption.
The doubts about the effectiveness of this support plan are all the more founded as the return to growth promises to be faster than expected. Even if 9.5 million jobs destroyed since the start of the pandemic are still missing, the good labor market figures published on Friday March 5 suggest that the reduction in health measures and the acceleration of vaccination will allow a return to normal sooner than expected.
Rising interest rates
With the recovery looming, we must certainly heal the wounds of the pandemic, but it is just as essential to project ourselves into the future with a recovery plan (and not only support for demand) capable of transforming the profile of the economy. US economy in terms of infrastructure, education or energy transition. But once that $ 1.9 trillion is spent, the Biden administration will have a hard time getting back to Congress by the midterm elections to claim new money.
Badly calibrated, this plan, in the current context of monetary and budgetary expansion, mainly runs the risk of overheating which could lead to a return of inflation. Rising prices appear to be under control in the short term, but bond market expectations are not to be taken lightly. Friday’s announcement of good employment figures was immediately greeted by a sharp rise in interest rates. A foretaste of the pressures that will now be increasingly strong for the Federal Reserve to tighten its monetary policy. If, by contagion, rates started to increase in Europe, they would weaken an already slower recovery than in the United States.
